Euro area toughens up as China deals blow to global fortunes

[FRANKFURT] The euro area might have built up enough momentum to shrug off China's woes for now.

Domestic demand, a major driver of German growth in recent months, is showing signs of improvement in other European countries too, and trade within the 19-nation bloc is picking up. That's fortuitous timing - just as China, one of the biggest destinations for the region's exports, seems increasingly less of a sure bet.

"There are quite some things that are supporting the domestic euro-zone economy," said Aline Schuiling, senior economist at ABN Amro Bank NV in Amsterdam.

"Investment is gaining some strength and domestic demand is improving. Assuming a soft landing in China, we think the eurozone will continue to grow robustly."

Policy makers have nurtured Europe's recovery with unprecedented stimulus and plunging oil prices are adding to support as gradually declining unemployment and pent-up investment demand fuel spending. The slow revival comes as exporters contend with the impact of weakening growth in emerging markets, which have been a pillar of trade in recent years, and the Federal Reserve's first interest-rate increase since 2006.

Finance ministers and central bankers have a chance to discuss the region's economic outlook in Luxembourg this weekend, when they gather for their informal semiannual meetings.

European Union Economic Affairs Commissioner Pierre Moscovici said in an interview with Bloomberg Television on Sept 5 that "the recovery in Europe is getting stronger," supported by domestic demand and investment that has been lacking in previous years.

While the optimists can take hope from better-than- previously reported growth in the first two quarters of the year, that stands in contrast to a weaker outlook for the currency bloc through 2017 from the European Central Bank. ECB President Mario Draghi cautioned last week that the economic upswing may prove "somewhat weaker" than expected, citing a slowdown in global trade.

Data back both arguments.

The euro-area economy grew faster than initially reported in the first two quarters, driven by consumer spending. Investment jumped the most since 2011 at the start of the year, and a pickup in bank lending suggests a dip in the three months through June will prove temporary.

German factory orders in July offer a glimpse at what may be in store for Europe's largest economy and the rest of the region. Demand from within the country and the currency bloc rose, while orders from non-euro countries fell the most since 2009.

"In Europe we are seeing indicators of good growth, which is because of a need to make up lost ground," said Olaf Wortmann, an economist at Germany's VDMA machine-maker association, which represents 3,100 companies. "There are a raft of countries: all the former crisis countries such as Spain, Italy is also investing heavily, but then also the UK is doing well."

At the same time, China is leading a slowdown in emerging markets that has potential to disrupt the euro area recovery. Companies have relied on those destinations since the recession; between 2008 and 2014, the bloc's exports to Brazil rose 40 per cent while shipments to China doubled, making it the third- biggest market after the UK and the US.

Now, imports to China are declining. Infineon Technologies AG, Germany's largest chipmaker, has already felt the impact and looked elsewhere.

"In China, we saw a slowing of growth in the last quarter," spokesman Bernd Hops said by telephone. "Developments in the premium-car market in Europe and in the US helped make up for the slowdown."

In the US, households are supporting growth and will probably continue to do so. The Federal Reserve may raise interest rates as early as next week in a sign of confidence in the recovery.

In Europe, officials still talk about easing policy to rekindle the economy. After six months of quantitative easing, Mr Draghi presented downgraded staff forecasts for growth and inflation on Sept 3 and promised more stimulus if needed.

The ECB's "policy of very low interest rates and its asset purchases will continue for as long as necessary," Executive Board member Benoit Coeure said in an interview published on the bank's website on Friday. "But growth is still not strong enough to create a sufficient number of jobs."

France remains a concern after growth stagnated last quarter and industry data showed it started the current one on far weaker footing than anticipated. The region's second-largest economy still has "some way to go," Mr Coeure said.

"The intra European impulses are coming - they're an important pillar," said Alexander Koch, economist at Raiffeisen Schweiz in Zurich. For the euro area, "we see a sustainable, solid upswing which shouldn't be stymied by a controlled cooling in China."

BLOOMBERG